Homeowner’s associations (HOA) are self-governing bodies that oversee and manage a residential community. Homeowners within the boundaries of the HOA automatically become dues-paying members and cannot opt-out of the HOA. Almost every HOA is run by a board of directors elected by the membership. The goal of an HOA is to maintain and increase home values in the community along with sustaining a quality lifestyle. Increasing the value of their property is appealing to every investor. However, when it comes to an HOA controlled property, it’s important to know what you are buying into.
HOAs try to maintain home values by setting standards and rules that all members must follow. HOAs have enforcement powers over these rules that can be very strong. As an investor, you are the member of the HOA, not the tenants that lease your property. If there is a rules violation, almost every HOA Board begins enforcement with the homeowner rather than the tenant.
HOAs have wide latitude in the rules that can be created and enforced. Members do vote on what the rules will be but once enacted, the rules apply to all members. There can also be a wide variation in how rigidly the rules are enforced and even which particular rules are enforced. Many HOAs have been accused of selective rule enforcement. Some rules may be enforced more vigorously, and some homeowners have been singled out for more vigorous enforcement than the community in general. It’s not uncommon for HOAs to be accused of unfair enforcement. But HOAs often do have strong enforcement authority.
Both federal and state laws govern the authority of HOAs with most of the authority controlled at the state level. At the federal level, the Fair Housing Act applies, as does the Disabilities Act, Fair Debt Collections Act, and other constitutional rights. The more specific laws are at the state level. State laws governing HOAs may also apply to other groups such as condos, co-ops, and some use the term “property owners' association” (POA) instead of HOA. State law variation is significant. For instance, states like Florida and California have a long list of laws that apply to HOAs but other states like Massachusetts have very few laws on the books. Investors (and all potential homeowners) need to understand the individual HOA Articles of Incorporation, CC&Rs (Covenants, Conditions, and Restrictions), and By-Laws as well as how the state allows these to be enforced.
Many states allow the HOA to foreclose on a property if HOA fees and fines go unpaid for an extended amount of time. Specific to investors, some states allow the HOA to directly collect the rent from tenants if the property owner fails to pay the fees and fines. Investors should also be aware that most HOAs hold the property owner responsible for all fines owed by tenants.
Clearly, you must read and understand each HOA’s unique Articles of Incorporation, CC&Rs, and By-Laws. It’s also a good idea to read recent board meeting minutes to learn if changes are being considered. Also important is reviewing the financials of the HOA. An HOA having financial difficulty is more likely to strictly enforce minor rule violations with maximum fines. On the other hand, many rule infractions go through an escalation of enforcement. A warning letter without a fine might be issued first, but if the HOA isn’t satisfied with the homeowner’s compliance, a fine will be assessed. If the fine remains unpaid, late fees and interest can be added. In some places, a lien can be placed against the house for unpaid fees and fines with the final step being foreclosure. A foreclosure sale will first pay the HOA with the balance going to the homeowner.
HOAs can (and often do) have unique rules and standards but here are examples of some of the most common:
HOAs do provide benefits or they wouldn’t exist. Many HOAs have amenities that they build and maintain. These include swimming pools, open spaces, golf courses, community centers, road maintenance, snow removal, and more. Some HOA amenities are particularly attractive to investors with tenants. These can include the upkeep of all private lawns and community trash removal.
In the end, investors need to determine if an HOA property aligns with their investment goals. While every investor wants to maintain and increase the property value there are also drawbacks. Charging enough rent to cover the HOA fees can be prohibitive or well above the market average. And there is likelihood of being held responsible for tenant fines. At the very least, you need to crunch the numbers. Or you and your tenants being forced to abide by all the rules simply might not be something you want.
What are your thoughts about investing in an HOA community? Please leave your comments.
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